New York-based BlackRock, the world's biggest provider of ETFs, and Vanguard Group, the Valley Forge, Pennsylvania-based firm best known for its index funds, are among firms that stand to benefit from a shift in investor preferences.
BlackRock's iShares ETFs drew $15.8 billion into fixed- income products this year through Sept. 30, even as investors pulled $3.3 billion from active bond funds at the firm, according to a quarterly filing.
The top-selling bond fund this year is the $46.6 billion Vanguard Total Bond Market II Index Fund, which tracks the U.S. bond market. The fund has taken in $4.8 billion in investor money this year through Oct. 31, data from Morningstar show.
Overall, index funds and ETFs have attracted $34.5 billion of the $88.4 billion that all U.S. fixed-income funds have gathered so far this year, according to Morningstar.
"We're in the very early stages of index domination in the bond world," Francis Kinniry, a principal in Vanguard's investment-strategy group, said in an interview. "It's very difficult for active bond managers to add value over time as it's less about security selection and more about big decisions on sectors and interest rates."
Over the past 10 years, 71 percent of active bond funds have performed worse than the U.S. fixed-income market, Kinniry said, citing numbers compiled by Vanguard using data from Morningstar and Barclays Capital. Over the past 15 years, 85 percent have trailed the benchmark, he said.
On the stock side, 62 percent of active managers lagged behind the U.S. stock market over the past 10 years, according to Vanguard using data from Morningstar and Dow Jones Inc. Over the past 15 years, 67 percent of the active U.S. managers performed worse than the market, the data show.
The $10.7 billion Vanguard Intermediate-Term Bond Index fund, which tracks an index rather than trying to beat it, has topped 99 percent of intermediate-term bond funds this year, according to data from Morningstar. The fund, which has an expense ratio of 22 basis points, has returned 9.2 percent, trouncing the returns earned by Gross and Fuss this year. Over the past five years, the fund has advanced at an annual rate of 7.5 percent, in line with Gross's fund.
Gross and Fuss have beaten indexes over a longer period. Over the past 10 years, the Vanguard fund has advanced 6.58 percent annually, according to Morningstar, behind Gross's return of 6.64 percent. Fuss's 10-year record is even better, rising at an average annual rate of 9.84 percent over the past decade.
Only two intermediate-term funds have beaten the Vanguard index fund this year. One is an actively managed bond fund run by Jeffrey Gundlach, the $1.2 billion DoubleLine Core Fixed- Income fund, which has advanced 10.3 percent this year. The other is the $328 million BlackRock Bond Allocation Target Shares, which has advanced 13 percent this year.